At Tax Mother, we assist in planning and executing share transfers, which involve transferring the beneficial interest in a company from one shareholder to another. Our expertise helps navigate the restrictions on share transfers in private limited companies.
To initiate a share transfer, it is important to follow these steps:
What is a share transfer?
Share transfer involves voluntarily transferring the rights and, possibly, the duties of a company member. This transfer occurs from a shareholder who no longer wishes to be a member of the company to a person who desires to become a member.
Shares in a company are generally transferable like any other movable property, unless expressly restricted by the Articles of the Company.
Who is involved in share transfer?
The following parties are involved in a share transfer:
1. Subscribers to the memorandum
2. Legal representative in the case of a deceased shareholder
3. Transferor (the existing shareholder transferring the shares)
4. Transferee (the person acquiring the shares)
5. Company (whether listed or unlisted)
Procedure to transfer shares of a Private Limited Company:
The following procedure should be followed to transfer shares in a Private Limited Company:
1. Obtain the share transfer deed in the prescribed format.
2. The transferor and transferee must duly sign the share transfer deed.
3. Stamp the share transfer deed with the name, address, and signature of the parties involved.
4. Attach the transfer document or allocation letter to the share certificate and send them to the company.
5. The company should process the paperwork and issue a new certificate to the transferor if the transfer is accepted.
6. The transferor will request the company to transfer their shares.
7. The company will send a notice to all existing members, informing them of the shareholder’s intention to transfer shares.
8. If no existing member shows interest in acquiring the shares, the company will inform the transferor that they can sell the shares to a non-member.
9. The transferor can then proceed with the transfer using the following process:
Form SH-4: The transferor must submit a duly executed, dated, and stamped SH-4 form to the company. The SH-4 form should include details such as execution date, CIN of the company, name of the company, class of securities, nominal value/amount called up/amount paid up of the securities, distinctive number of shares, certificate number, transferor’s name, folio number, signature (witnessed), transferee’s name, father’s name, address, email id, occupation, folio, and signature. The instrument of transfer should be duly stamped in accordance with the Indian Stamp Act of 1899.
Once all the required details are submitted, the company will review the documents and register the transfer if everything is in order. Within one month of receiving the Instrument of Transfer, the company will issue and endorse a share certificate to the transferee.
Transfer of shares by physical mode: The ownership of shares can be transferred by delivering physical possession, but a contractual relationship exists between the members and the company. The transfer of shares involves the execution of a transfer deed, starting with an agreement to sell, followed by the execution of the deed of transfer, and finally, the registration of the transfer.
Transfer Deed: The transferor and transferee must execute a share transfer deed as an instrument. This share transfer deed should be signed and delivered to the company along with the relevant share certificates. The company will not accept any transfer instrument that does not comply with these provisions. In the physical mode, the transfer should be executed using Form SH 4.
Acknowledgement: Sometimes companies send an acknowledgment of the instrument to the transferor before scrutinizing the documents. This notice may be in the form of a letter with a checklist for scrutinizing the transfer documents. Some companies also issue transfer receipts. If the transfer application is made by the transferor and payment for the shares is partly made, the company should not object to the transfer within two weeks from the receipt of the notice. The company is not legally obligated to provide notice to the transferor when the transferee lodges the transfer documents.
Scrutiny: All transfer documents should be scrutinized to ensure that they are in order. If the transfer documents are not acceptable, they should be returned to the transferee. If the transferor’s signature in the transfer instrument differs from the signature in the company’s records, the documents will be returned.
Approval: Every transfer of shares must be approved by the Board of Directors or a committee. Registration can only take place after obtaining approval. If the Articles of Association empower the board to delegate the power of share transfer approval, it may delegate it to a committee that does not include directors of the company.
Registration: Share transfer is not complete without registration. The share transfer form serves as a legal contract between the transferee and the company, with the transferee agreeing to accept the shares. Once the company approves and registers the transferee’s name in the registry, the transferee becomes a member of the company. Maintaining a register of transfers is not a statutory requirement.
Delivery of Share Certificate: The transfer becomes effective only upon registration of the shares by the company. The company must deliver the share certificate within one month from the receipt of the relevant transfer instrument. The instrument of transfer should be endorsed with the name of the transferee.
Timelines: For companies with share capital:
• The company should not register any transfer of shares or ownership interest to any beneficial owners within 60 days of execution, unless proper instruments are used.
Application by the transferor:
• The transfer should not be registered until the company notifies the transferor within two weeks of receiving the notice.
No opposition certificate:
• Timelines vary based on different events, such as within two months from the date of incorporation for memorandum subscribers, within two months from the allocation date for allocating all shares of the company, and within six months of the allocation date for debenture allocation.
Penalties: For the company:
• Minimum penalty: Rs. 25,000
• Maximum penalty: Rs. 500,000
For an officer in default:
• Minimum penalty: Rs. 10,000
• Maximum penalty: Rs. 100,000
